| September 1, 1989 | |
| International Audits Division | Specialty Rulings |
| K.B. Harding | |
| Attention: Teresa Eng | 957-2129 |
| File No. 7-3975 |
SUBJECT: 24(1)
This is in reply to your round trip memorandum dated June 2, 1989 wherein you requested we confirm that the rate of withholding tax on payments falling within the previous paragraph 245(2)(b) of the Income Tax Act (the "Act") was 15 percent under the Canada-U.S. Income tax Convention (1942) (the "1942 Convention") and 25 percent under the Canada-U.S. Income Tax Convention (1980) (the "1980 Convention").
The case of Indalex Limited v. The Queen (86 DTC 6039 and 88 DTC 6053) the Federal Court, Trial Decision stated on page 6053 (86 DTC) that "... the predecessor of 245(2) was interpreted as in effect adding a new sub-clause to each of Parts I, III and IV of the then Act as appropriate". If further stated that "(t)he intention of Parliament is clear, and that is that a benefit of the kind in question in this case was intended to be taxable in the hands of a non-resident under Part XIII of the Act, at the rate of tax provided by subsection 212(1)".
Accordingly, we are of the view that tax should be withheld at the rate of 25 percent on the amount of benefits falling within paragraph 245(2)(b) but subject to any tax agreements or conventions which Canada has with other countries.
Since the maximum rate of withholding tax under article XI of the 1942 Convention is 15 percent to individuals residing in or corporations organized under the laws of the United States, where such residents do not have a permanent establishment in Canada, we are limited to that rate. Where such residents have a permanent establishment in Canada, the rate will be 25 percent.
It is our view that payments under paragraph 245(2)(b) of the Act will fall within Article XXII (Other Income) of the 1980 Convention and will be subject to 25 percent withholding tax. Such payments in our view would only fall within paragraph 2 of Article XXII where the payer is an estate or trust not described in subparagraphs 108(1)(j)(ii), (iii), (iv) and (v) of the Act.
We trust this is adequate for your purposes.
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch